InterestRates

I wrote at Yahoo about "Why Only Interest Rates?" (Will post article tomorrow). I just noticed that the RBI released an audio recording of a post-policy teleconference.

A question was asked: Rise in rates will result in appreciation in currency. Will RBI allow that? Will imported inflation reduce?

Answer from RBI: we don't intervene in forex markets with the objective of setting interest rates. To the extent that we have intervened it is to offset volatility. If there is an inflow from interest rate arbitrage, we won't intervene. Yes, if currency moves up it will reduce imported inflation and curb demand.

We haven't seen a big change in the forex rates, and Current Account Deficit is kinda-sorta matched by the Capital inflows. Yes, a rate appreciation would help but even when there is a relatively open capital account.

My take: I'll believe it when I see it (that RBI won't intervene). But yes, they seem to have not really intervened in the markets directly recently (though reserves have risen). Will they continue to NOT do so if the rupee sees 40?

Second, we don't have a "relatively open capital account". People aren't allowed to hold rupees outside India, foreigners aren't allowed to buy our traded debt (government or private), we aren't allowed to go abroad and raise large amounts of money. The statement is like saying tigers are very calm inside a cage. Of course we're calm, there's no wiggle room!

Question: Wouldn't it be useful to change CRR?

Answer: We have to distinguish between liquidity and demand control. Liquidity is the basis on which a financial institution would expand credit. In that context liquidity is in a deficit since May 2010. Given that, we don't see any significant benefits with moving up CRR, which could also be disruptive because of uncertainties in cash availability. Transmission from policy to lending rates is strong - we saw banks moving up rates nearly immediately.

My take: I don't really agree. First, disruptive is a strong word; but it does help to have liquidity taken out of the system, in any case. Repo rates work the demand situation; that is, they reduce customer demand for credit. But they don't really make banks want to lend lesser, or worry about their capital ratios, which is what needs to be promoted if credit growth needs to really moderate. A 0.5% hike in CRR would have taken out just Rs. 25,000 crore from the system, which would then have to be borrowed at the 8% rates, keeping banks in check better.

(I've phrased it my way)

Yesterday's T-Bill auctions were the first after the rate hike and there has been a spike (Only 91 day and 364 day t-bills were auctioned yesterday, 182 day T-Bills will happen next wednesday)

The 10 year bond yield had spiked on Tuesday to about 8.44%. Effectively people are willing to pay more for a 1 year bill than for the 10 year bond.

91 day T-Bills (on which interest rate futures were introduced earlier this month on the NSE) ended up auctioning out at 8.39%. Since this has spiked up, the buyers of 91-day IRFs on the NSE would have seen a loss (higher yields=lower prices).

The RBI increased Repo rates to 8% (from 7.50%), a 50 basis point increase. Repo is what banks pay to borrow overnight from the RBI, a key rate that is usually the floor for inter-bank lending rates and thus interest rates in the system. Read the rest of this entry »

Look at the first point in the First Quarter Review:

Taming inflation warrants continuation of anti-inflationary monetary stance

• Inflation risks stay, while growth showed signs of moderation. On current reckoning, growth is likely to stay around trend growth of around 8.0 per cent. However, downside risks have increased. Overall some moderation in growth is expected in 2011-12. Various expectation surveys also indicate the same.

• Near-term upside risks to inflation remain significant. Price pressures are expected to persist through Q2 as well and then moderate towards the later part of 2011-12. Breaking inertial dynamics of wage and food price rise is important for arresting inflation.

• Risks to baseline growth and inflation projections may arise from three factors: (1) significant departure of monsoon from normal, (2) a collapse or re-build of global commodity price bubble, and (3) Euro zone debt crisis assuming full-blown proportions.

• Notwithstanding the slowdown in growth, high inflation requires continued anti-inflationary bias with a close watch and responsiveness to new information.

(Emphasis mine)

Inflation is high and looks like it will stay high unless the RBI takes an "anti-inflationary bias", according to the release. This is suggestive that the rates will go  up. We don't know if it will be 0.25% (25 basis points) or 0.50%, yet.

RBI goes on to say that world inflation is rising preparing for an "exit from an excessively accommodative monetary policy". Basically, the western economies printed too much, and now stuff will go up in dollar/euro/yen denominations.

Also that inflation has become "generalized" (i.e. not just food) since Dec 2010. Plus, even with a good monsoon, food prices may not fall due to higher costs and higher support prices. That, says the RBI, will take structural reforms to fix, in the absence of which RBI will compensate by using monetary policy.

A quick survey on twitter showed that all respondents (bar one) saw a 25 bps rate hike about half of them saying that it *should* be 50bps but RBI's chicken.

I expect a 25 bps rate hike, but the strong statements in there have given rise to a feeling, a 20% probability type of feeling, that we might see 50 bps. Few more minutes. Stay tuned.

The ECB raised interest rates by 25bps (or 0.25%) to 1.5%.

China recently raised rates, by 25bps, to 6.56%.

Sweden also pushed its rates up to 2%, while Australia held rates steady at 4.75%.

Malaysia hiked the Bank Cash Reserve Ratio (CRR) to 4% (from 3%), while keeping overnight rates at 3%. CRR is the cash banks are supposed to hold against withdrawals (India has 6% CRR)

Indian rates are currently 7.5% for overnight repo (that's overnight borrowing from the central bank)

In India, various banks have pushed their rates up:

• ICICI Bank pushed base rate up to 9.75% (up 25bps)
• SBI also went to 9.5% (up 25 bps)
• Corporation Bank (up 35 bps to 10.25%) , Canara Bank (up 25bps to 10.25%) and a number of public sector insurers have already done their bit.

For someone with a loan, this is not a lot of fun. But people tell me they only get letters saying that their EMIs have been extended in tenure, the value of each EMI is left unchanged. Have you had a different experience?